Data, cloud, and subscription services, in a market that is looking a bit crowded, which of these data-based stocks would you choose?
Here we have modern cloud-based subscription services ideal for the new digital era we live in. These two companies are similar-enough that comparing the two could present an interesting opportunity to find a new investment option.
So, which would you choose? Datadog (NASDAQ: DDOG) or Splunk (NASDAQ: SPLK)?
The bull and bear case for Datadog
Datadog allows its clients to monitor their own databases, services, and servers using a cloud-based application. In particular, many software developers find Datadog’s cloud-based tools useful for monitoring applications and computer infrastructure. All this makes Datadog a software-as-a-service (SaaS) platform. SaaS companies generally are a good investment opportunity as they tend to generate strong and stable revenue on a recurring basis.
This strong, recurring revenue has been particularly evidenced in its latest earnings report. One full year as a public company and Datadog has managed to increase its revenue by 61% year-over-year (YoY) to $155 million for the quarter. In addition, the number of customers had also increased by an impressive 52% YoY — from 727 to 1,107.
The pandemic certainly helped in this regard as everyone switched to remote working and companies opted for cloud-based computing platforms to carry out daily work, causing demand for Datadogs services to remain high.
Amongst the 1,107 companies that use Datadog, there are some pretty big names. Dreamworks Animation studio, 21st Century Fox, Samsung, and even the NASDAQ all utilize Datadog. Indeed this company is so successful in attracting big-name clients that it even turned down an offer to be bought by Cisco in 2019, choosing instead to IPO in 2020.
As for the bear case, Datadog has seen some volatility over the past month, and this volatility could continue as it is a young, somewhat newly IPO’d business that directly competes with many other companies. However, overall, the share price of this stock has increased more than 130% in the last 12 months.
The bull and bear case for Splunk
Splunk provides companies with ‘Machine Learning’ which can automate everyday I.T. functions without the need for a full I.T. team, essentially providing machine data-analysis. This reduces costs in operations and in personnel. Splunk also gives its customers a tool that can be used to manage the log information of multiple devices and analyze the data generated from those same devices.
Splunk began transitioning last year into a subscription-based model which, like Datadog will bring in regularly recurring revenue. Unfortunately, this shift from multi-year term licenses to a subscription model has negatively impacted the revenue growth YoY. This does not mean that Splunk is struggling to grow, but rather, that it will no longer receive large one-off payments from its clients, and instead will receive the same amount in smaller bite-sized chunks throughout the year.
Due to this, investors were less than impressed with its most recent earnings call, seeing an 11% decline in revenue YoY and its stock 20% after hours that same day. This depressing result could continue for the next few earnings calls as the company will not finish transitioning its model to subscriptions until 2023.
Luckily, here at MyWallSt, we are long-term investors and a long-term position on this stock might just be the mentality that investors need before Splunk can drag itself out of this funk. In addition, the machine learning aspect of Splunk’s business could be a great asset as we push into an AI revolution, bringing more interest into the companies prospects down the line.
Yet, if Splunk continues to perform badly, this could signify a greater problem than just revenue changes. It could be a sign that the company might have lost its competitive edge as Datadog and many other companies continue to grow. Either way, this might be a risky investment.
So, which is a better investment?
Currently, Datadog outperforms Splunk. Datadog has all the signs of a company that will grow fast, giving a boost to its investors’ portfolios. As for Splunk, the next few years could see investors lose faith due to its transition to a subscription-based model and the impact on revenue streams, but it is in other performance indicators that shareholders will really need to keep an eye on.
Datadog is by far the better investment for an investor that is looking for low-risk and high profit. Splunk on the other hand is a long-term option as it presents a bit more of a riskier opportunity.
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MyWallSt operates a full disclosure policy. MyWallSt staff currently holds long positions in companies mentioned above. Read our full disclosure policy here.